Amara hedges its bets, not its gold

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2012-11-30

When Rand Merchant Bank started pestering Peter Spivey three years ago to meet with the legendary founder of Cluff Gold, now known as Amara Mining (AMZ-T, AMA-L), to see whether he could help the company with its troubled assets in West Africa, the New Zealand-born mine developer and operator was intrigued.

John Gordon Cluff—also known as Algy—had made a killing in North Sea oil in the 1970s and subsequently from his mining interests in Africa, a continent he first explored in the Army after eschewing a university education. (The entrepreneur has also held interests in rubber plantations in Malaysia and for a time owned The Spectator.)

“They said I must meet this Algy Cluff character in London, he needs someone to sort out the company,” Spivey recalls during a recent interview in Toronto. “So I went and met him and I thought, poor soul, you really do need help, because he had these projects that were really struggling. They were negative US$3 million in the bank, which is why Rand Merchant Bank was chasing me. He owed them money.”

But Spivey also saw that Cluff’s gold assets had some real potential and that the company was trying to make the transition from an explorer to a producer without really having anyone on the team with significant experience in either building or operating mines. The challenge proved irresistible and Spivey, who has over the years made a name for himself as a trouble-shooter in Africa, signed on as chief executive in January 2010.

Before joining Amara, the metallurgist had spent a decade in Africa and is credited with developing the Sabodala gold mine and the Grande Cote mineral sands project in Senegal, where he lives today, overseeing the development and commissioning of Placer Dome’s North Mara project in Tanzania, now owned by Barrick Gold (ABX-T, ABX-), and sorting out the processing plant at Resolute Mining’s (RSG-A) Golden Pride mine in Tanzania when it ran into trouble in the late 1990s.

At the time Cluff Gold caught up with him in late 2009, Spivey was general manager of Iamgold’s (IMG-T) Mupane gold mine in Botswana and the company had plans to send him to its Essakane project in Burkina Faso. But what Spivey really wanted was to build something from scratch. “I didn’t want to go to Essakane because it was already half built, and I didn’t want to inherit someone else’s project,” he explains of his decision to join Amara Mining instead. “I thought I would give Cluff a few months and see if I could help him sort it out.”

Those few months rapidly turned into three years and today the junior gold producer — with a market cap of US$200 million — is covered by twelve mining analysts; has about US$30 million in the bank; a US$20 million credit facility and strategic partnership with South Korean heavyweight Samsung; and remains un-hedged, a fact that makes Spivey particularly proud. “We’re really going places now,” he says.

Amara’s production growth looks promising because it has development projects like its flagship Baomahun project in Sierra Leone as well as its Yaoure project in Cote d’Ivoire. At the same time it has cash flow from its producing Kalsaka gold mine in Burkina Faso and will soon from the nearby Sega deposit it purchased in May from Orezone Gold (ORE-T).

Kalsaka produced 71,500 oz. gold last year and the company expects another 60,000-70,000 oz. gold from the mine this year. The mine is expected to start winding down in the second quarter of next year, but there should be no interruption in either gold production or cash flow the way Amara sees it, because it is converting Sega’s exploration licence to a mining lease, which it expects to get during the first quarter of 2013, and production is anticipated to start in the first half of next year. “We’ll take the mining equipment at Kalsaka 20 km up the road to Sega and start mining, crushing it on site, and trucking it down to our plant at Kalsaka and just keep producing from there,” Spivey explains.

“Kalsaka was always a short life and so it never had a great deal of valuation on it but last year we hit our target and we made US$51 million at the EBITDA level,” he continues. “For a little heap leach mine in the bush that only cost us US$40 million to build in the first place, it’s not a bad return.”

Earlier this year, Amara purchased Sega in a cash and share deal worth about US$26.5 million and a preliminary economic assessment completed in October confirmed the potential viability of mining oxide and transitional material at Sega and transporting it to the company’s existing heap leach operation at Kalsaka for processing. Highlights of the PEA were a post-tax net present value of US$49.5 million and an internal rate of return of 48% using a gold price of US$1,500 per oz. and a 10% discount rate. The PEA estimated an initial mine life of 21 months based on 162,825 oz. gold. Cash costs per oz. produced excluding royalties were pegged at US$821 per oz.

“It’s handy,” Spivey says of Sega. “It’s not world shattering, but it allows us to completely fund our exploration, our G&A costs, and it means we don’t have to go back to the markets.”

Sega has potential exploration upside as well. When Amara bought it, Orezone had just completed a 10,000-metre drill program that had turned up eleven anomalous zones. Amara has narrowed the targets down to five and, so far, drilling has not disappointed. At the Touli prospect, hole 232 returned 26 metres grading 3.05 grams gold per tonne from 8 metres; hole 119 returned 26 metres of 2.14 grams gold from 24 metres; and 18 metres of 3.49 grams gold in hole 290 from 18 metres.

But it is its Baomahun project in Sierra Leone that will turn Amara into a mid-tier producer. The fully permitted project is expected to contribute an additional 135,000 oz. gold a year starting from 2015 and also has exploration potential along strike. Amara expects to complete a feasibility study on the project in the first half of next year.

In November, Amara completed an updated resource for Baomahun built on a new geological model that re-analyzed the structural controls of gold mineralization at the site. The company hired a renowned structural geologist, Dr. Leslie Wright, and asked him to re-log the core and re-do the mapping.

While the overall grade of the resource is lower than previously estimated due to the lower cut-off grade of 0.5 gram gold instead of 1 gram gold, the high-grade core has been retained and, furthermore, a significant number of additional tonnes of material previously regarded as waste has been interpolated as part of the updated resource model.

“What we found was there is still a high-grade halo, which we always knew about, but there is also a low-grade halo sitting around it,” Spivey says. “So within the pit now we know more precisely where it sits, where it’s high grade, where it’s low grade. But just as importantly, there are five separate zones or domains within the pit that were never drilled because under the old model that was considered waste.”

Currently the project has indicated resources of 38.4 million tonnes grading 1.82 grams gold for 2.24 million oz. and inferred resources of 6.6 million tonnes grading 2.52 grams for 540,000 oz. The estimate includes both open pit and underground resources, but the open pit makes up 85% of the outlined tonnage.

The previous resource estimate, which was released last year, outlined indicated resources of 25.6 million tonnes grading 2.5 grams gold for 2.06 million oz. (The increase in overall oz. in the updated resource came without any significant sacrifice made to the high-grade core of mineralization, which is now at 23 million tonnes grading 2.6 grams for 1.92 million oz. in the indicated category.)

Amara also has targets near Baomahun that it is exploring. Four hundred metres north of Baomahun is Pujehun South, which demonstrates similar geology and where the company has outlined between 100,000 and 200,000 oz. gold; and 15 km away is Makong South, where artisanal workings spread over a distance of about 1.9 km. Trenching has returned samples with highlights such as 10 metres of 15 grams gold and the company hopes to start drilling there in March.

Finally, at Yaoure in the Ivory Coast, Amare hopes to define a large mineralized sulphide deposit underlying previously mined oxide resources. Small, high-grade zones exist there within wider, moderate grade zones. Highlighted drill results include 11.47 metres of 2.45 grams per tonne and have given Spivey confidence that existing sulphide resources at Yaoure (5.6 million tonnes at 1.6 grams gold for 292,000 oz. gold in the measured and indicated category) can be significantly increased. Spivey says he hopes to delineate an initial resource there by the first quarter of 2013. As an added bonus the project is close to infrastructure, including a 150-megawatt power station 5 km away, that has operated continuously since the 1970s.

“It is 5 km from the power plant and it is also the third biggest body of water in Africa so there is plenty of water for processing,” he says. “Two companies, Endeavour and Perseus, are developing mines in the Ivory Coast right at the moment and are also tapping into this grid and they’re locking into long-term off-takes at around 8-9¢ an hour. It’s still incredibly cheap compared to everybody else. So if the oil price goes up? So what? You’re decoupled and that will be the same for us.”

Spivey also notes that there are very good towns around Yaoure so the company won’t have to build a big camp. He estimates it will cost about US$300 million to build a mine there.

As for Amara’s strategic partnership with Samsung, the initial US$20 drawdown provides the company with the balance sheet flexibility to use existing cash flow to fund its exploration programs while maintaining development momentum at Sega and Baomahun without having to hedge, Spivey explains. And if Samsung and Amara prove that the financing model works for the South Korean conglomerate, which uses a large amount of physical gold in the production of its electronics (15 tonnes of gold a year, according to Spivey), then the same model could be used to support development of Amara’s other projects.

“I have worked for many places that have suffered for many years as a result of hedging,” Spivey says, “so there is no hedging with this deal.” The US$20 million will be repaid by delivering 1,929 oz. gold to Samsung every month at a 2.25% discount to the moving spot price. The price is set on the day the gold is handed over, plus 2.5% on top of U.S. Libor. “Add the two together plus an establishment fee makes it a 10% effective cost of capital at current gold prices,” Spivey says. “Ten percent to us is an extremely good financing cost working in West Africa without hedging.”

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